UNDERSTANDING
FRACTIONAL SHARES

Fractional shares are a game-changer that’s making investing more accessible and popular. Their features are particularly appealing to new investors and this is how they work.

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Investing in the stock market can sometimes feel like a members-only club, particularly when you look at the share prices of some of the world’s biggest companies. Buying even a single share can seem like a significant outlay. But what if you could own just a small piece of that company?

What Are Fractional Shares?

In simple terms, fractional shares allow you to own less than one whole share of a company’s stock.

Instead of needing the full amount to buy one share, you can invest a smaller sum of money to purchase a portion, or fraction, of that share. Think of it like buying a slice of a cake rather than the entire thing.

If a whole share costs $1,000, but you only want to invest $100, fractional shares make it possible to buy 0.1 (or one-tenth) of that stock. This approach opens the door to owning parts of companies whose full share price might otherwise be out of reach.

How Do Fractional Shares Work?

Essentially, brokers buy whole shares and then divide them among clients who wish to purchase smaller amounts.

Behind the scenes, the process is managed by your broker. When you decide to invest a specific amount of money, say $50, in a particular company’s stock using a platform that offers fractional shares, the broker executes this.

The broker might already hold whole shares, or they might aggregate your order with others to buy whole shares. They then allocate the corresponding fraction of a share to your account.

Selling works in a similar way; you specify the amount you wish to sell, and the broker handles the transaction, crediting your account accordingly.

Crucially, if the company pays dividends, you’ll typically receive your proportionate share based on the fraction you own. For example, if you own half a share, you’d receive half the dividend paid out per full share.

What Are the Benefits of Fractional Shares?

Fractional shares offer several compelling advantages, making investing more approachable for many. Let’s explore some of the key benefits that make fractional shares particularly appealing:

Accessibility and affordability

Perhaps the most significant advantage is the lowered barrier to entry. You don’t need hundreds or thousands of dollars to start. With fractional shares, you can begin investing with much smaller sums, perhaps $10 or $20, depending on the broker’s minimum amounts.

Investing using fractional shares makes it possible to invest in high-priced stocks. US tech giants Apple, Amazon, and Google (Alphabet), for example, all have stock prices which require investors to provide substantial capital to buy just one share. When adopting the fractional share approach, the amount you invest is based on the amount of money you want to invest, not the share price.

Diversification

Diversification is a cornerstone of sound investment strategy — spreading your money across different investments to reduce risk.

Fractional shares make diversification easier, especially for those with limited capital. Instead of putting all your $100 in one share, you could potentially split it across five or ten different companies by buying fractions of their shares. This allows you to build a more balanced portfolio from the outset.

Dollar-Cost Averaging

Fractional shares are ideal for implementing a strategy called dollar-cost averaging. This investment strategy involves investing a fixed amount of money at regular intervals (e.g., monthly), regardless of the share price. By doing this, you buy more fractions when the price is low and fewer when it’s high. Fractional shares make this seamless because you can consistently invest your chosen fixed sum ($50, $100, etc.) each time, acquiring the corresponding fraction using dollar-cost averaging.

Are There Risks to Buying Fractional Shares?

While beneficial, fractional shares do come with potential drawbacks that investors should consider. It’s important to be aware of the potential downsides before diving in:

Limited liquidity and transferability

Fractional shares might not always be as instantly tradable as whole shares. Their liquidity can depend on the broker’s ability to match buyers and sellers or manage their inventory of whole shares. Furthermore, transferring fractional shares between different brokers can sometimes be problematic, as not all brokers support them, or they may require you to liquidate (sell) the position first, which would generate additional transaction fees.

Lack of voting rights

Owning shares in a company usually entitles you to voting rights on corporate matters. However, fractional shareholders typically do not receive these voting rights. While this might not be a major concern for many small investors, it’s a difference compared to owning whole shares.

Broker dependence and fees

Fractional shares exist within your brokerage account and are reliant on that specific broker’s systems and policies. Different brokers may have varying rules regarding minimum investment amounts, the types of shares available fractionally, and potentially associated fees (although many offer commission-free trading, always check the fee schedule).

How To Buy and Sell Fractional Shares

Buying and selling fractional shares is usually straightforward with brokers such as eToro offering this capability. The process is typically integrated seamlessly into the trading platform so that it mirrors the way that you would buy a whole share:

1. Open and Fund Your Account: Ensure you have an account with a broker that offers fractional shares and deposit funds.
2. Choose Your Stock: Search for the company you wish to invest in.
3. Specify Investment Amount: Instead of entering the number of shares, you’ll usually specify the monetary amount (e.g., $50) you want to invest. The platform will calculate the corresponding fraction you’ll receive based on the current market price.
4. Place Your Order: Confirm the details and place your buy order. The fractional share will be added to your portfolio.
5. Selling: The selling process is similar. You can typically choose to sell a specific fraction or a specific monetary value of your holding.

Final thoughts

Fractional shares have democratised investing, allowing more people to participate in the potential growth of leading companies and build diversified portfolios, even with modest starting capital.

There is still a need to follow the golden rules of investing, but using fractional shares allows you to invest in a way which suits your personal investment goals.

Learn more about investing in fractional shares by joining the eToro Academy.

FAQs

Can you get dividends on fractional shares?

Yes, absolutely. If you own a fractional share in a company that pays dividends, you are entitled to receive a proportionate share of that dividend. For instance, if you own 0.25 of a share and the company pays a $1 dividend per full share, you would receive $0.25.

Do you pay taxes on fractional shares?

Yes. Profits made from selling fractional shares (capital gains) and any dividends received are subject to standard tax protocols, just like gains and dividends from whole shares. You should be aware of your annual Capital Gains Tax (CGT) allowance and the Dividend Allowance. Tax rules can be complex and subject to change, so it’s wise to keep good records and consider consulting a tax professional if unsure.

eToro does not provide tax advice and the information provided should not be interpreted as such. Customers should seek independent tax advice.

In What Countries Are Fractional Shares Available?

Fractional shares are widely available in major markets like the United States and the United Kingdom. Availability is growing rapidly across Europe and other parts of the world as more brokers adopt the technology to offer them. However, availability can vary by broker and by specific stock, so always check with your chosen platform.

Can You Buy Fractional Shares on ETFs?

Yes, many brokers that offer fractional shares for individual company stocks also offer them for exchange-traded funds (ETFs). This is particularly useful as ETFs are already a diversified basket of assets, and being able to buy fractional units makes accessing them even more affordable and flexible.

Why Are US Shares So “Expensive”?

The nominal price of a single US share, particularly for large tech companies, can appear high for several reasons. Firstly, strong historical performance and significant company growth lead to higher valuations. Secondly, some large US companies haven’t engaged in stock splits as frequently as companies in other markets might have. A stock split increases the number of shares outstanding and lowers the price per share without changing the company’s overall market value, making individual shares seem cheaper. Market dynamics, investor demand, and overall economic factors also play a significant role in share prices. It’s less about being “expensive” in value terms and more about the high nominal price per share.